6.4 Alliances with the railroads
From the beginning, Rockefeller succeeded in extorting from the railroads a deal that gave him major advantage over his competitors : preferential rebates. Moreover, those same railroads also committed themselves to inform the Standard Oil on every move of their competitors, and collaborated on its side in price wars by raising the price of transport for a given area.
|How the Secret Rebate System worked
Example of an actual preferential rebate system used by railroads in 1871 for the transport of crude oil from the Oil Regions to New-York. Source Ida Tardell, 1904.
The preferential rebate system
As the biggest client of the railroads, the Standard could get extremely favorable terms from them.
For each destination, a public rate was published, which was almost never used. The members of the Standard Oil scheme got a substantial rebate, like 30-50% off the public price. So far nothing extraordinary, but please go on. People outside of the scheme not only had to pay full price, like $ 2.56 a barrel when their competitor paid only $ 1.56 but the railroad paid back to Rockefeller himself the difference with the public price, here $ 1 ! This deal strangled the competitors who had to compensate for this inflated costs elsewhere.
The resistance of the public and a Pennsylvania court's judgement forbade this scheme, which was the base of the South Improvement Company, but the huge size of the Standard's orders gave it sufficient leverage over the railroads to still gain rebates substantial enough to beat the smaller refineries. These smaller competitors sold their refineries one after the other for a song to Rockefeller.
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